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Are mortgage lenders guilty of the housing bubble? A UK perspective

Xiao, Qin; Devaney, Steven


Steven Devaney


Existing theoretical models of house prices and credit rely on continuous rationality of consumers, an assumption that has been frequently questioned in recent years. Meanwhile, empirical investigations of the relationship between prices and credit are often based on national-level data, which is then tested for structural breaks and asymmetric responses, usually with subsamples. Meen (1999) argues that local markets are structurally different from one another and so the coefficients of any estimated housing market model should vary from region to region. We investigate differences in the price-credit relationship for 12 regions of the UK. Markov-switching is introduced to capture asymmetric market behaviours and turning points. Results show that credit abundance had a large impact on house prices in Greater London and nearby regions alongside a strong positive feedback effect from past house price movements. This impact is even larger in Greater London and the South East of England when house prices are falling, which are the only instances where the credit effect is more prominent than the positive feedback effect. A strong positive feedback effect from past lending activity is also present in the loan dynamics. Furthermore, bubble probabilities extracted using a discrete Kalman filter neatly capture market turning points.


Xiao, Q., & Devaney, S. (2016). Are mortgage lenders guilty of the housing bubble? A UK perspective. Applied economics, 48(45), 4271-4290.

Journal Article Type Article
Acceptance Date Feb 16, 2016
Online Publication Date Mar 30, 2016
Publication Date Sep 25, 2016
Deposit Date Feb 25, 2016
Publicly Available Date Mar 30, 2016
Journal Applied economics
Print ISSN 0003-6846
Electronic ISSN 1466-4283
Publisher Routledge
Peer Reviewed Peer Reviewed
Volume 48
Issue 45
Pages 4271-4290
Keywords Regional house prices, Housing credit, Markov-switching, Asymmetric responses, Turning points
Public URL
Publisher URL
Additional Information This is an Accepted Manuscript of an article published by Taylor & Francis in Applied economics on 30/09/2016, available online:


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